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ARROWHEAD WATER PRODUCTS LTD.

Management Discussion and Analysis


For the third quarter ended June 30, 2006 (unaudited)

ARROWHEAD WATER PRODUCTS LTD. MANAGEMENT DISCUSSION & ANALYSIS (MD&A) Form 51-102F1
FOR THE THIRD QUARTER ENDED JUNE 30, 2006 HIGHLIGHTS OF THE THIRD QUARTER: Operating Cash Flow increased $235,616 or 641% over same period last year. Revenue increased 13% over the same period last year. Quarterly revenue highest in Company history. Consolidated Northern BC operations: sold Ft. John Property for a net profit of $42,000 while reducing administration costs starting in the four quarter. Secured exclusive National Water contract for WestJet Airlines coast to coast. Launched our new recyclable 15L product with test into a major retail grocery chain starting in the fourth quarter.

This managements discussion and analysis (MD&A) should be read in conjunction with the interim financial statements of Arrowhead Water Products Ltd. ("Arrowhead or the Company") for the third quarter ended June 30, 2006. Additional information with respect to Arrowhead can be found on SEDAR at www.sedar.com. This MD&A is dated as of August 28, 2006. The reporting and measurement currency is the Canadian dollar. This MD&A contains forward-looking statements. Forward-looking statements are based on current expectations of future events that involve a number of risks and uncertainties which could cause actual events or results to differ materially from those reflected in the MD&A. Forwardlooking statements are based on the estimates and opinions of Arrowheads management at the time the statements were made. Arrowhead assumes no obligation to update forward-looking statements should circumstances or managements estimates change.

OVERALL PERFORMANCE
The water industry continues to provide many opportunities for growth and advancement. Arrowhead Ltd has embarked upon a number of new initiatives that will drive Arrowhead as an innovator and leader in the water business in Western Canada. Our new Vision and strategic focus will lead the way to profitability and increased revenues. The Company has experienced significant growth, management changes and operational changes that have occurred over the past two years. We are on track integrating these changes and returning the Company back to being profitable and poised for solid growth. Results from the three month period ended June 30, 2006 when compared to 3rd quarter ended June 30, 2005 are: Gross margin increased to 39% from 35%; Total expenses as a percentage of sales decreased to 39% from 46%; Operating cash flow for the quarter was $279,144 as compared to $43,528 for the same period in 2005; Net Earnings for the quarter of $24,564 as compared to a net loss of $149,721 for the same period last year: Sales increased 13% to $2,255,225 from $2,003,808;

Improvements in the first nine months over fiscal 2005 represent the commencement of Arrowheads commitment to returning gross margins to historical rates of 40-45% and controlling operating expenses while simultaneously maintaining annual sales growth in the 15-25% range. Going forward, the Companys focus will be first and foremost on improving its profitability through both revenue growth and cost controls.

Overview
Arrowhead is a publicly traded company, listed on the TSX Venture Exchange under the symbol AWP-A. The Company is engaged in the bottling and distribution of water products in Alberta. Arrowhead is Canadas largest Canadian-owned, publicly-traded water company engaged in the production, sales and distribution of large format (11.3, 15 and 18.9 litre) bottles of drinking water. Arrowheads distribution channels include the Canadian retail grocery market, the residential market and the office market in Alberta. Arrowhead sells reverse osmosis, distilled and spring water as well as providing water coolers and point of use filtration coolers for dispensation. Buyers of the water do so as a replacement or alternative to their municipal or local water supply. These third quarter consolidated financial statements include the accounts of Arrowhead and its wholly owned subsidiaries, Arrowhead Spring Water Ltd. and 351222 Alberta Ltd. (collectively the Company). All inter-company transactions and balances have been eliminated upon consolidation. Arrowhead is pleased to announce the procurement of an exclusive water services contract, with WestJet Airlines servicing 23 locations in Canada. Arrowhead is very pleased to be associated with a company such as WestJet Airlines, a Calgary based company. Arrowhead Water Products Ltd. is providing a complete array of water purification and services (bottled water, water cooler rentals, point-of-use filtration and commercial reverse osmosis technology) for all locations of WestJet Airlines in Canada. Arrowhead Water Products Ltd and our distribution network will be servicing over 4,900 employees in Canada.

Arrowhead Water Products Ltd. is also pleased to announce our launch of our new 15 litre PET compressible bottle to several major grocery chains in Alberta. This new product has many advantages for our retail channel, Totally green: 100% recyclable - $.20 deposit versus. $10 refundable deposit in the 5 gallon bottle channel. Less required floor space for our retailers. No more lost revenues from deposits. Ultra-light bottles, versatile and easy to transport.

RESULTS OF OPERATIONS
For the three month period ended June 30, 2006

Revenues
Revenues for the three-month period ended June 30 2006 were $2,255,225 as compared to $2,003,808 for the three-month period ended June 30, 2005. This represents an increase in revenue of $251,417 or 13% when compared to the same period last year. Arrowheads revenue is derived from three main channels: 1) Retail water sales; 2) Home and office water sales; and 3) Cooler rentals, Point of Use Filtration and ancillary sales.

Results from these three channels were: 1) Retail sales for the third quarter increased to $1,609,509 from $1,335,953 a 20% increase; 2) Home and office sales decreased to $561,654 from $598,579 an 6% decrease; 3) Cooler rentals and other sales increased to $84,062 from $69,276a 21% increase. Water sales growth remains positive. Management focusing primarily on cost reduction and increase revenues through profitable growth and price increases across all of our channels during the quarter.

Cost of sales and gross margin


During the quarter ended June 30, 2006, the total cost of sales was $1,383,918 (representing 61% of total revenues). This is compared to $1,286,368 for the period ended June 30, 2005 (representing 64% of total revenues). For the quarter ended June 30, 2006, gross margins increased to 39% of revenue as compared to 36% of revenue for the prior year. Cost of sales increased $160,090 for the period as a result of: 1) increase in demand volume for delivery solutions to service areas outside of Alberta (3rd party freight), these costs increased $52,113. 2) Repairs and Maintenance (Fleet) increased $21,137 for the period. 3) Warehouse costs Building & Equipment Maintenance increased $12,907 All other delivery costs and other cost of sales items increased in a ratio comparable to sales increases. The Companys year-end goal of steadily improving the gross margin of 37% in fiscal 2005 to a target of 45% showed progress in the first nine months ended June 30, 2006. In the first quarter of 2006, the gross margin was 39%, in the second quarter the gross margin was 41%, in the third quarter 39% respectively. As a result of management changes, processing improvements and operating efficiencies; continued improvement in the forth quarter is expected.

Sales and marketing


Expenses incurred in sales and marketing consisted primarily of salaries, sales commissions, travel, and other costs required to retain existing clients and develop new client relationships. Other expenses such as advertising, promotional materials, trade shows and other marketing programs are also included in this category. Sales and marketing costs for the quarter ended June 30, 2006 where $80,519 as compared to $64,571 for quarter ended June 30, 2005 a 25% increase. In the first two quarters of 2006, the majority of these costs where focused on developing new markets and media advertising. Beginning in the third quarter of 2006 the marketing budget focused on expanding Arrowheads existing business through a much more defined results oriented direct sales force and the addition of our Sales Director. This direct sales focus will continue in the fourth quarter.

General and Administrative


General and administrative expenses include management and administrative personnel, professional services, training, office and occupancy costs as well as other costs associated with operations including bad debts. General and administrative costs for the quarter ended June 30, 2006 were $466,365 as compared to $584,726 for the prior year. This represents a 20% decrease in general and administrative costs over the prior year.

This decrease of $118,361 in general and administrative costs for the quarter resulted mainly from costs associated with corporate restructuring with human resources, reducing labour costs, eliminating 3rd party consultants and implementing a solid expense reduction purchasing & procurement plan with all vendors of the Company. The Companys focus 2006 for remains on controlling cost of sales and administrative expenses. The ratio of general and administrative expenses to sales was 31% for fiscal 2005 as compared to 26% in the first quarter of 2006, 24% in the second quarter of 2006 and 21% for the third quarter of 2006. The Company has exceeded our goal for fiscal 2006 were to reduce administrative expenses to 24% of sales.

Amortization
For the third quarter ended June 30, 2006 the amortization of tangible and finite-life intangible assets represents the normal expense consistent with the Companys amortization policy. The amortization expense for this quarter was $282,235 as compared to $219,651 in the prior year. With the Companys large investment in fixed assets over the past three years, amortization will continue to increase in future periods.

Operating profit before interest, amortization, stock-based compensation and taxes


For the third quarter ended June 30, 2006, the operating profit was $366,546 compared to $114,688 for the quarter ended June 30, 2005, an increase of $251,858. Management expects that operating profit before interest, amortization, stock-based compensation and taxes will continue to improve significantly in the fourth quarter 2006 and fiscal 2007.

Stock-based compensation
The Company recognizes compensation expense when stock options are granted under the fair value method. The fair value of stock options is determined using the Black-Scholes option pricing model. This expense is a non-cash expense, the cumulative effect of which is reflected in Contributed Surplus on the balance sheet. During the quarter ended June 30, 2006, the Company issued 625,000 options exercisable at $0.32 to key employees of the company. The compensation costs for the vesting of stock options issued in 2005 and 2006 resulted in a charge to income $14,468. For further details on the stock based compensation calculations, refer to note 10(e) of the Annual Audited Consolidated Financial Statements dated September 30, 2005.

Income taxes
For the quarter ended June 30, 2006, the Company recognized no future income tax expense as compared to a future income tax recovery of $48,781 in the prior year quarter. As a result of the losses reported prior periods, there is no allocation for future income tax expense.

Net profit (loss) after taxes


For the quarter ended June 30, 2006, the Company reported a net profit of $24,564.This compares to a net loss $149,721 for the quarter ended June 30, 2005, an increase of $174,285. The third quarter profit is the Companys first quarterly profit since the second quarter of 2005. These prior losses are due to growth into new markets and significant one-time operational expenses. With a focus on growth in existing markets combined with cost reduction strategies, management believes Arrowheads profitability will continue to improve in the forth quarter of 2006.

RESULTS OF OPERATIONS
For the nine month period ended June 30, 2006 Results from the nine month period ending June 30, 2006 when compared to the same nine month period 2005 are: Gross margin decreased to 39% from 41%; Total expenses as a percentage of sales decreased to 43% from 44%; Operating cash flow for the nine-month period was $608,035 as compared to $569,579 Net loss for the period of $188,493 as compared to 136,776. Working capital decreased to .99:1from 1:40:1; Total assets increased 9% to $9,583,211 from $8,781,445; Debt to equity ratio increased to 1.39:1 from .83:1;

Revenues
Revenues for the nine-month period ended June 30, 2006 were $6,270,281 as compared to $5,754,850 for the nine-month period ended June 30, 2005. This represents an increase in revenue of $515,431 or 9% when compared to the same period last year. Arrowheads revenue is derived from three main channels: 1) Retail water sales; 2) Home and office water sales; and 3) Cooler rentals, Point-of-use Filtration and other sales. Results from these three channels for the nine months ended were: 1) Retail sales for the period increased to $4,359,676 from $3,899,781 a 12% increase; 2) Home and office sales increased to $1,661,142 from $1,638,429 an 2% increase; 3) Cooler rentals and other sales increased to $249,463 from $216,640 a 15% increase. Water sales growth from both the retail and home and office channel remains positive, even with management focusing primarily on cost reduction during the period.

Cost of sales and gross margin


During the nine month period ended June 30, 2006, the total cost of sales was $3,798,948 (representing 61% of total revenues). This is compared to $3,371,851 for the period ended June 30, 2005 (representing 59% of total revenues). For the period ended June 30, 2006, gross margins decreased to 39% of revenue as compared to 41% of revenue for the prior year. Cost of sales increased $427,089 for the period as a result of: 1) increases in demand volume for delivery solutions to service areas outside of Alberta (3rd party freight), Repairs and Maintenance (Fleet). 3) Fuel costs. All other delivery costs and other cost of sales items increased in a ratio comparable to sales increases.

Sales and marketing


Expenses incurred in sales and marketing consisted primarily of salaries, sales commissions, travel, and other costs required to retain existing clients and develop new client relationships. Other expenses such as advertising, promotional materials, trade shows and other marketing programs are also included in this category. Sales and marketing costs for the nine months ended June 30, 2006 where $272,836 as compared to $171,873 for the same period ended June 30, 2005 (a 59% increase). During the nine month period, the majority of these costs where focused on developing new markets and media advertising. Beginning in the third quarter of 2006 the marketing budget focused on expanding Arrowheads existing business through a much more defined results oriented direct sales force and the addition of our Sales Director. This direct sales focus will continue in the fourth quarter

General and administrative


General and administrative expenses include management and administrative personnel, professional services, training, office and occupancy costs as well as other costs associated with operations including bad debts. General and administrative costs for the period ended June 30, 2006 were $1,462,191 as compared to $1,582,487 for the prior year. This represents an 8% decrease in general and administrative costs over the prior year. This decrease of $120,296 in general and administrative costs for the period resulted mainly from our cost reduction strategy and improved efficiencies. The Companys focus for 2006 remains focused on controlling cost of sales and administrative expenses. The ratio of general and administrative expenses to sales was 27% for the first nine months ending June 30, 2005 as compared to 23% in the first nine month period of 2006, exceeding our 2006 target 24% of sales.

Amortization
For the nine month period ended June 30, 2006 the amortization of tangible and finite-life intangible assets represents the normal expense consistent with the Companys amortization policy. The amortization expense for this period was $789,035 as compared to $590,182 in the prior year. With the Companys large investment in fixed assets over the past three years, amortization will continue to increase in future periods.

Operating profit before interest, amortization, stock-based compensation and taxes


For the nine-month period ended June 30, 2006, the operating profit was $608,035 compared to $569,579 for the same period ended June 30, 2005, an increase of $38,456. Management expects that operating profit before interest; amortization, stock-based compensation and taxes will continue to improve significantly in 2006 and beyond.

Stock-based compensation
The Company recognizes compensation expense when stock options are granted under the fair value method. The fair value of stock options is determined using the Black-Scholes option pricing model. This expense is a non-cash expense, the cumulative effect of which is reflected in Contributed Surplus on the balance sheet. For the nine-month period ended June 30, 2006 the Company issued 625,000 options exercisable at $0.32 to key employees of the company. The compensation costs for the vesting of stock options issued in 2005 and 2006 resulted in a charge to income $50,276. For further details on the stock based compensation calculations, refer to note 10(e) of the Annual Audited Consolidated Financial Statements dated September 30, 2005.

Income taxes
For the nine-month period ended June 30, 2006, the Company recognized no future income tax expense as compared to a future income tax expense of $6,596 in the prior year. As a result of the loss reported in prior periods there is no allocation for future income tax expense.

Net profit (loss) after taxes


For the nine-month period ended June 30, 2006, the Company reported a net loss of $188,493 This compares to a net loss $136,776 for the same period ended June 30, 2005, an increase of $51,717. In the third quarter of 2006 there has been a substantial improvement of $24,564 in net profit when compared to a net loss in the prior two quarters of $213,717 With a focus on growth in existing markets combined with cost reduction strategies, management believes Arrowheads profitability will continue to improve in the forth

FINANCIAL INSTRUMENTS
Canadian generally accepted accounting principles require that the Company disclose information about fair value of its financial assets and liabilities. Fair value estimates are made at the balance sheet date, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties in significant matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

LIQUIDITY
The Company in the past has financed its operations mainly through cash generated by operations; however with large capital expenditures in fiscal 2005 and during the first 9 months of 2006 the Companys long-term debt obligations have increased by $629,251 compared to fiscal 2005. These expenditures include a blow-molding machine for our new 15L bottle and financing new delivery vehicles. Arrowhead had cash and cash equivalents (net of bank indebtedness) of $276,482 compared to $265,743 September 30, 2005, representing a $10,739 increase. Management feels that existing cash and projected cash flow is sufficient to meet 2006 and 2007 cash flow requirements.

CAPITAL RESOURCES
The Companys balance sheet carries balances of long-term debt and share capital. Arrowhead has demonstrated its ability to raise additional capital through issuances of debt and equity. The Company has purchased over $3,000,000 in capital assets over the past two years, established new production facilities, opened up new sales markets in Western Canada and set up new computer operating systems.. Managements task in fiscal 2006 and 2007 will be to utilize these capital resources and return the company to profitability.

GOODWILL

Goodwill represents the excess of the purchase price over the market price of acquired businesses. Effective October 1, 2002, the Corporation adopted the new accounting standard whereby goodwill is no longer amortized but is subject to an annual review for impairment. Forecasts for the next three years are positive and will focus on growth and cost reduction. Accordingly, management believes no impairment in the carrying balances of Arrowheads goodwill is evident at June 30, 2006.

OUTSTANDING SHARE DATA


At June 30, 2006 the Company had 30,832,530 Class A Common Shares (2005 30,762,530), 1,395,000 stock options (2005 1,510,000) and warrants - nil (2005 348,847) to acquire common shares, issued and outstanding. No share capital activity occurred in the nine-month period. During the period, 625,000 options were issued and 648,000 options expired. For details of share capital please refer to note 10 of the Annual Audited Consolidated Financial Statements dated September 30, 2005.

Mission Statement Arrowhead Water Products Ltd will be an innovative, pre-eminent provider of water solutions in Western Canada with emphasis on quality, professionalism, service and shareholder value.

MANAGEMENTS RESPONSIBILITY FOR THE COMPANYS FINANCIAL STATEMENTS The management of Arrowhead is responsible for the integrity of the accompanying financial statements, which have been prepared by management in accordance with generally accepted accounting principles for financial statements in Canada. The preparation of the financial statements necessarily involves the use of estimates and careful judgment, particularly in those circumstances where transactions affecting a current period are dependent upon further events. All financial information presented in Managements Discussion and Analysis is consistent with the financial statements. To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control that provide reasonable assurance that the financial records are reliable and form a proper basis for the timely

and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. The Board of Directors discharges its responsibilities with respect to the financial statements primarily through the activities of its Audit Committee, which is comprised of all directors who are not employees of the Company. This committee has met with management to review the Companys reported financial performance and to discuss audit, internal control, accounting policy and financial reporting matters. The financial statements were reviewed by the Audit Committee and approved by the Board of Directors. These financial statements have not been reviewed by the Companys auditors. NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument 51-102, Part 4, subsection 4.3 (3), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management. The Company's independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements.

Copies of Arrowheads other disclosure can be viewed at www.sedar.com

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